Corporate Sustainability Due Diligence Directive (CS3D)

The Corporate Sustainability Due Diligence Directive (“CS3D”, the “Directive”) is a key initiative of the European Commission aimed at fostering sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. CS3D entered into force on 25 July 2024 and aims to harmonise the regulatory framework that mandates certain companies to implement comprehensive due diligence processes. These processes are designed to identify, mitigate, and eliminate adverse impacts on human rights and the environment within a company’s operations and its entire chain of activities. Under CS3D, EU Member States are required to enact laws that compel in-scope companies to significantly enhance their environmental and human rights’ due diligence. Non-compliance with these obligations could result in substantial monetary penalties and liability for any resulting damages.

CS3D will ultimately apply to companies meeting specific criteria, impacting approximately 6,000 EU companies and 900 non-EU entities with operations in the EU. The Directive includes provisions to facilitate compliance and minimise the burden on companies, both within the scope and throughout the value chain. While micro companies and SMEs are not directly covered by the proposed rules, the Directive offers supportive and protective measures for SMEs, which may be indirectly impacted as business partners in value chains.

Member States have until 26 July 2026 to transpose CS3D into national law. One year later, on 26 July 2027, the rules will start to apply to companies on a phased basis, based on their size and turnover according to the following timeline;

EU Companies (applicable to limited companies and partnerships):

• Effective 26 July 2027, companies (or companies which are ultimate parent companies, on a consolidated basis) with more than 5,000 employees on average and a net worldwide turnover of more than EUR 1,500 million in the last financial year.

• Effective 26 July 2028, companies (or companies which are ultimate parent companies, on a consolidated basis) with more than 3,000 employees on average and a net worldwide turnover of more than EUR 900 million in the last financial year.

• Effective 26 July 2029, companies (or companies which are ultimate parent companies, on a consolidated basis) with more than 1,000 employees on average and a net worldwide turnover of more than EUR 450 million in the last financial year; and

• Companies (or companies which are ultimate parent companies, on a consolidated basis) with franchising or licensing agreements in the EU where royalties amounted to more than EUR 22.5 million in the last financial year and with a net worldwide turnover of more than EUR 80 million in the last financial year.

Non-EU Companies (applicable to third country equivalent limited companies and partnerships):

• Effective 26 July 2027, companies (or companies which are ultimate parent companies, on a consolidated basis) with a net turnover of more than EUR 1,500 million in the EU in the financial year preceding the last financial year (there is no employee threshold for non-EU companies);

• Effective 26 July 2028, companies (or companies which are ultimate parent companies, on a consolidated basis) with a net turnover of more than EUR 900 million in the EU in the financial year preceding the last financial year;

• Effective 26 July 2029, companies (or companies which are ultimate parent companies, on a consolidated basis) with a net turnover of more than EUR 450 million in the EU in the financial year preceding the last financial year; and

Companies (or companies which are ultimate parent companies, on a consolidated basis) franchising or licensing agreements in the EU where royalties amounted to more than EUR 22.5 million in the EU in the financial year preceding the last financial year, with a net turnover of more than EUR 80 million in the EU in the financial year preceding the last financial year.

Due Diligence Obligations

The CS3D mandates that in-scope companies integrate due diligence into their policies and risk management systems. They must identify and assess actual or potential adverse impacts within their operations and across their chain of activities. Companies are required to prevent and mitigate potential adverse impacts and address any actual adverse impacts, providing remediation where necessary.

Previous versions of CS3D extended due diligence obligations to both upstream and downstream activities across a company’s entire value chain. However, the final version narrowed these obligations to a company’s “chain of activities.” This includes activities of upstream business partners related to the production of goods or provision of services for the company, and activities of downstream business partners related to the distribution, transport, and storage of products when performed for or on behalf of the company.
Additionally, CS3D requires in-scope companies to implement a notification and complaints procedure. They must also monitor the effectiveness of all policies and measures taken to comply with the CS3D. Communication requirements are included, but a sustainability report prepared and published in accordance with the Corporate Sustainability Reporting Directive (“CSRD”) will satisfy these requirements.

Financial Sector

Regulated financial entities must adhere to CS3D’s due diligence requirements, but only concerning their own operations, their subsidiaries, and their upstream activities. For now, their downstream activities involving customers who use their products or services are not included.

Additionally, CS3D mandates that the Commission review and report to the European Parliament and Council by 26 July 2026 on whether further sustainability due diligence for regulated financial undertakings is required, potentially extending CS3D’s scope to include financial services and investment activities.

CSRD vs CS3D

CS3D is designed to work in tandem with CSRD, with the goal of improving the reporting effectiveness and thoroughness under CSRD. The European Sustainability Reporting Standard 1 expands reporting boundaries and emphasises due diligence throughout the value chain but lacks detailed implementation guidance. CS3D provides a methodology for meeting due diligence requirements and helps companies identify adverse impacts. CSRD covers the reporting aspect of due diligence obligations for companies subject to both regulations. This relationship also includes the preparation, adoption and implementation of climate transition plans.

Take Aways

In conclusion, CS3D represents a significant step towards harmonising sustainability practices across the EU. By mandating comprehensive due diligence processes, CS3D aims to mitigate adverse impacts on human rights and the environment, fostering a more responsible and sustainable business environment. The Directive’s phased implementation ensures that companies have adequate time to comply, while also providing support for SMEs indirectly affected. As Member States transpose these rules into national law, the CS3D will play a crucial role in shaping the future of corporate responsibility and sustainability within the EU and beyond.

For more information about CS3D, or to find out how Cafico International can assist your business, please contact Yolanda Kelly.